The Goldman Sachs congressional hearings on April 27 revealed the way the investment bank took advantage of the collapse of the housing market and rid itself of its housing securities. Goldman cleared its own books of risk by dumping it on other investors.
Partners knew that the market was declining but continued to sell their own Mortgage Back Securities and Collateralized Debt Obligations. The media have concentrated on the many conflicts of interests which accrued to Goldman?s benefit and for which they got paid very well even as their ?clients? were suffering massive losses from the same deals.
But the key issue is not morality; it is the housing bubble and decline. Why was so much money–domestic and foreign–put into the housing and finance sectors? As more and more manufacturing went abroad during the past twenty years, two things happened. Wages in remaining industry and other sectors declined or stagnated.
Instead of an industrial policy, Democrats promoted home ownership as a way to aid their working class base without conflicting with their corporate funders. Thus Senator Jack Reed of Rhode Island said in 2006, ?When homes are doubling in price in every six years and incomes are increasing by a mere one percent a year,? extending home ownership was critical to the nation. Paul Krugman observed a year earlier, ?These days Americans make a living by selling each other houses, paid with money borrowed from China.? The plummeting housing prices and financial crisis demonstrated that there is a limit to this model of growth.
The Obama administration is recreating the economy that led to the crisis. It has already strengthened the banking sector. Proposed reforms may eliminate some of the more egregious practices but will not alter finance?s political economy: outsourcing, free trade, and a strong dollar. The government has spent $12.6 billion in home-buyer?s credits. Most of the people who used it would have bought homes anyway. It did not create new jobs. The program supported asset prices by delaying foreclosures and pushing demand.
President Obama has done nothing to rebalance or alter the economy that got us into the mess. He has spoken about the need to export more but has done nothing to make this happen. He has said that the United States can no longer be the world?s consumer of first and last resort. But he seems unaware of what would change the situation. He frequently stages photo-ops at manufacturing plants, and yet, the nation lost 1.2 million manufacturing jobs in 2009 alone. The U.S. is good at mandating environmental standards, but the Chinese are better at supplying the necessary technology. When the California Solar Initiative, a way of getting solar panels onto roofs began in 2007, 2 percent of the modules used were Chinese. At the end of 2009, the figure was 46 percent. Every nation that has a strong manufacturing sector has an industrial policy. If the talk about good jobs is not merely rhetorical, then the United States will need one too.